Author: Andrea Ramazzotti (Universitas Mercatorum)
Motivation
Do minimum wages create spatial mismatches in local labour markets by affecting migration decisions? Internal migration is key to the efficient allocation of labour within a country, underpinning agglomeration economies and moderating aggregate unemployment. However, internal migration has fallen across high-income countries in the past three decades, despite spatial differences in productivity and income being on the rise. In this article I explore whether minimum wages might have a role in this decline, particularly when their nominal value is equalized across the country.
Italy’s spatial equalization of minimum wage rates
I explore this issue by studying the case of Italy between the 1960s and the early 1980s. Until 1968, sectoral collective bargaining agreements set different nominal minimum wage rates for different areas of the country, based on scaling coefficients that had been devised in the post-war period. This “wage zone system” meant to differentiate nominal wages according to local productivity and cost of living, even though they were not systematically updated. Following an ideological shift in favour of greater egalitarianism among workers, in 1969 labour unions successfully fought for the repeal of the wage zone system. By 1972, sectoral collective agreements applied the same nominal minimum wage rate across the whole country.
This spatial equalization of nominal minimum wages is a characterizing feature of Italy’s wage-setting institutions to this day. Several authors have suggested that it alters incentives to migrate by making real wages higher in low-cost-of-living, low-productivity areas. Consequently, they hypothesize that it causes spatial misallocation between local labour markets, with negative consequences for aggregate employment. However, no research has tested whether these spatial mismatches originated with the repeal of the wage zone system, yet. My article addresses this gap in the literature.
A new spatial dataset with annual frequency
To answer the research question, I have reconstructed a large dataset of migration, labour market variables and economic variables at the province level (NUTS-3) with annual frequency, from 1962 to 1981, encompassing the period before and after the repeal of the wage zone system. The reconstruction has required digitization of printed primary sources across several publications and harmonization to ensure comparability between sectors and provinces over time.
The longitudinal series include minimum wage rates and average earnings for blue-collar workers across manufacturing sectors, original estimates of local cost of living differentials, my own reconstructions of unemployment and labour productivity in the industrial sector. Additionally, I have digitized bilateral migration flows between Italian provinces with annual frequency, totalling over 160,000 observations.
These new series show that migration decreased steeply in the years following the repeal of the wage zone system. Moreover, they provide evidence that the reform significantly reduced spatial variation in minimum wages between provinces by removing virtually all variation within sectors. The descriptive evidence thus offers support to the hypothesis that the policy shock was large enough to disrupt migration decisions for Italian workers.
Minimum wages and internal migration
To test the influence of minimum wages on migration flows, I first estimate an augmented gravity model across the whole study period, and I find that minimum wages at destination acted as a significant pull factor of internal migration. Controlling for additional push and pull factors, I find that minimum wages at destination retain significant explanatory power, even accounting for their disemployment effect and for cost-of-living differentials. These results are validated by a battery of robustness checks.
The estimates also suggest that the drop in minimum wage differentials after the repeal of the wage zone system explained as much as 25.7% of the subsequent reduction in migration flows. I validate the relevance of the reform by showing that wage zone coefficients influenced migration flows before their repeal, but not afterwards. Overall, the analysis shows that the repeal of the wage zone system was associated with a large and significant reduction in internal migration, both at long and short distance.
The decoupling of wages and local productivity
To discuss why minimum wages would disrupt migration to such an extent, I first show that the repeal of the wage zone system decoupled minimum wages from local productivity: until 1969, the system had been relatively effective in adjusting minimum blue-collar wages to industrial value added per worker, but afterwards there remains no conditional correlation between the two variables. In fact, in real terms (i.e. accounting for local cost of living), low-productivity provinces ended up with greater minimum wages after the reform, which is in line with current evidence. I also show that the reform was responsible for turning negative the urban wage premium, which is again aligned with today’s research on Italy’s spatial mismatches in labour markets.
Spatial mismatches and the polarization of unemployment and productivity
Considering additional effects, I find that the mismatch in minimum wages was also transmitted to average blue-collar earnings, whose strong correlation with productivity pre-reform disappeared after the repeal of the wage zone system. This suggests that the shock affected not only marginal workers but had repercussions across the wage distribution.
It also appears that the reform initiated the polarization of unemployment between Northern and Southern Italy, which is characteristic of Italy’s disconnected labour market. Finally, I show that emigration also became more polarized, particularly due to declining migration within areas after the repeal of the wage zone system, although lower mobility was generalized.
Conclusions
The article shows that wage-setting institutions, such as minimum wage rates, can have complex, long-term repercussions on local labour markets. Applying the same minimum wage irrespective of workers’ location, in fact, can be motivated by apparent fairness considerations, but it is prone to introducing mismatches if local productivity and cost of living are heterogeneous enough between different areas of the country.
Italy is an exemplary case due to the spatial equalization of minimum wage rates set through collective bargaining agreements. This article has provided the first historical test for this hypothesis, showing that the introduction of the current system was indeed associated with the inception of Italy’s mismatches in local labour markets.